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Extend Health and the Medicare Exchange Model

After the recent S-1 filing for Extend Health’s IPO this seems like an appropriate time to comment on some of the drawbacks to the so called “Medicare Exchange” model (sometimes referred to as a “Medicare Coordinator” or “Medicare Marketplace”) of which Extend Health is the largest provider. AON Hewitt Navigators, a result of AON Hewitt’s acquisition of Senior Educators, is another major provider. The purpose of a Medicare Exchange, like Extend Health, is to help a large employer move from a group benefit plan for Medicate eligible retirees to individual insurance policies.
Medicare Exchanges often claim that their advantages include: 1) helping employers move from a defined benefit model to a defined contribution model, 2) increasing plan choice for seniors, 3) eliminating the administrative burden of managing plans for geographically dispersed retirees, 4) lowering plan costs for retirees and 5) receiving on-going and unbiased advice from call center representatives who are licensed insurance agents. Let’s tackle each of these one at a time.

First, most employers have already moved to a defined contribution model and those that have not certainly do not need to move to the Medicare Exchange model to do so. This can simply be done by fixing the amount of the employer’s contribution towards these benefits. Medicare Exchanges rely on creating Health Reimbursement Accounts or HRAs to accomplish this but this actually is more complicated than necessary. An employer can simply notify plan participants of the move to a fixed contribution and need not establish HRAs.

Second, it is true that Medicare Exchanges increase plan choice exponentially. Extend Health’s own S-1 filing states they offer over 4,000 plans for retirees to choose from. This is not a good thing for retirees who have spent years relying on the trust and knowledge of their former employer’s benefits team to sift through the market choices and then present a small subset of the best plans to the retirees. Choosing between the dozens or even hundreds of plans that might be available for a retiree in a particular geography can be overwhelming, even with the help of an internet based decision support engine. Not every 85 year old has an internet connection and those that do might find this task difficult. Most retirees (75%+) forced onto a Medicare Exchange choose the plan closest to their previous group plan which indicates that retirees are not looking for hundreds of more choices.

Third, employers can eliminate the administrative burden of managing retiree plans by hiring the right advisor who specializes in handling all the administration including open enrollment, communications, customer service, etc. Again, it is not necessary to move to the Medicare Exchange model to accomplish this goal. Moreover, patchworks of geographically disperse plans are very uncommon today. This is a reference back to the time when some employers had multiple Medicare Advantage plans covering different parts of the country because nationwide Medicare Advantage plans did not exist. The Medicare Improvement for Patients and Providers Act (MIPPA) changed that with the creation of nationwide Medicare Advantage PPOs. The vast majority of the plans offered by Medicare Exchanges are Medicare Advantage plans but Federal support for these plans is declining as a result of the Patient Protection and Affordable Care Act and other legislation. This is causing the prices of these plans to rise dramatically and some insurance companies are dropping out of the Medicare Advantage market altogether. Coventry Healthcare is an example of this and there are others.

Fourth, moving to a Medicare Exchange model does not reduce costs for all the retirees in a particular group. It may lower costs for some of the younger and healthier retirees but on a weighted average basis across the entire group, the costs will go up faster overtime. One reason for this is bargaining power. A single retiree has zero bargaining power over a large insurance carrier. A single retiree is a “price taker” in the individual insurance policy market. If their insurance carrier increases the premium 30% the retiree has no recourse but to change plans. Conversely, a large employer with several thousand retirees has incredible bargaining power, especially when coupled with a competitive RFP process run by an experienced advisor specializing in retiree health benefits.

Finally, let’s look at the incentives for the Medicare Exchange. Where does their revenue come from? According to Extend Health’s S-1 filing, for the year ended June 30th, 2011 commissions from insurance carriers represented 98.7% of revenue with the remainder coming from fees associated with managing HRA accounts. While the commission levels from each insurance carrier vary and are negotiated by the Medicare Exchange, they tend to be front loaded in the first year of the policy. That means that the Medicare Exchange has a huge incentive to move retirees to a different plan or “churn” them every year. They have an incentive to get another commission, not find the best plan for the retiree and keep him or her there.

It should also be noted that group plans can offer benefits and obtain federal subsidies that are not allowed on the individual market. It seems that the only real advantage of a Medicare Exchange is to enable companies who want to eliminate retiree benefits altogether a more palatable way to do it. They can say to retirees yes we are eliminating your benefits but we are providing you with a Medicare Exchange who will help guide you through the individual market. Since any retiree can evaluate multiple plans through a software engine available for free on the CMS website, maybe even this is not such a big advantage. No one from CMS will call the retiree a year later to try and get them to switch plans even if the retiree is happy and the premium increase is modest.

2 thoughts on “Extend Health and the Medicare Exchange Model”

Mark, well written. I think unfortunately the Medicare Coordinator model has gained momentum and companies determine that is the direction they want to go before exploring any other options. In my history of working with group retiree health plans, retirees look to their employer to due their diligence and offer retiree coverage that is affordable to the retiree population and keep the group’s equity in tact. The Medicare Coordinator model is nothing more than dumping your retirees into the open market with a sales spin wrapped around it that they are taking care of the retiree by allowing the Medicare Coordinator to place the coverage. They could have left their group plan in place and offered a much reduced employer contribution or none at all but keep the group in a situation where benefits and price could be negotiated.

Working through the Medicare Coordinator is still confusing to the retiree with the hundreds of choices and I would bet that most retirees would ask the coordinator on the phone, “which one should I choose?” Also, I would be very curious to know out of all the people placed through the coordinator, how many were placed in the highest commission products available. I do believe that the coordinators also require that if employer money is being given to the retiree, it must be slotted for coverages placed by the coordinator and if the retiree wants to change, they must go back to the coordinator to sell them a new policy or surrender their employer contribution…which keeps the retiree tied to them for as long as the company will contribute.

The Coordinators will present to a company multiple low cost plans for the retirees to choose from but I believe the bulk are placed back into higher cost Medicare Supplement type indemnity plans which is what they were most likely rolling off of from their company and could have been offered on a group platform in lieu of “dumping” the retirees.

Perhaps companies should consider that although today, they may need to reduce their retiree health costs due to the economy, but potentially in the future, if the company rebounds and takes a strong financial position, that they could then make a contribuition to their retirees at that time…Once you bust up your group, you take all the P.R. risk and it is very hard to put it back together later. The other thing I hear is that a company feels that if they switch their group plan to just a sponsored plan, that they still take on some accounting risks so maybe we should discuss that next.

Mark – You raise many good points. Let me address just two of them. First, you are correct that Medicare Coordinators push plan sponsors to link employer contributions to plans only offered through the Medicare Coordinator. If a retiree wants a plan they find on the CMS website and the retiree goes direct to the carrier they lose the employer contribution. Historically, I know from direct experience that at least one Medicare Coordinator pays their internal sales people significantly higher commissions if they convince the plan sponsor to sign an exclusive deal. In other words, the employer agrees that the Medicare Coordinator can set up the HRA accounts so that the retirees lose the employer contribution if they find a better plan (without commissions) and go around the Medicare Coordinator.

Second, if a plan sponsor decides to keep the group plan but eliminate their employer contribution it creates zero balance sheet liabilities provided that the plan is fully insured and the permanent elimination of the contribution is communicated in writing to the plan participants. If the plan is self-funded it may create a small balance sheet liability because the actuaries and accountants will assume that any claims short fall at the end of the year will be covered by the plan sponsor and not recuperated through higher premium equivalents in subsequent years. For example, if the group plan is a fully insured Medicare supplement with a fully insured Part D plan no balance sheet liability would exist and any previous liability associated with that plan would fall to zero.